A financial blog on investing in stocks, commodities and the gold bull market.

Tuesday, January 29, 2008

Gold breakout

In a previous post I pointed out that gold had broken out to new all time highs. I also quoted historic averages that once a commodity breaks out to new all time highs the average gain has been 180%. Tonight I'm going to show you what has transpired already in oil and what could be unfolding in the precious metals markets right now.

The first chart is a long term view of oil. Notice that once the all time highs of $40 were broken oil only dipped back below that level once and then only very briefly. After that it tested the $40 breakout once never to be seen again. At $100 oil has tacked on 150% above the old highs.

Moving to the next chart we see that gold has now also broken to new highs. It has also tested the breakout level. While anything is possible there is a strong probability that we will never see $850 again for years to come. Now is not the time to lose your position in gold. If we get lucky and it does pull back then buy more. I'm not very confident that we are going to get that option though. I'm definitely not willing to lose my position on the hopes that it will pullback below the breakout level. Even if it did how would you know when to buy? I dare say most people let their emotions control them when an asset is going down and is on sell they are to afraid to buy.

If gold was to only match oil and move up 150% that would give us a gold price of $2125. However I think it will move up much further than oil will because it's much easier for the public to buy into the gold market. When the public finally catches on and they will catch on eventually they are going to push gold prices into the stratosphere. A buy and hold strategy will guarantee you will capture all those gains. Trying to trade the PM bull will most likely guarantee you will miss most of those gains. If you want to become rich from this bull market then you have to be willing to do what it takes to ride this bull.

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Technical trading rules

T1. A move followed by a sideways range often precedes another move of almost equal extent in the same direction as the original move. Generally, when the second move from the sideways range has run its course, a counter move approaching the sideways range may be expected. T2. Reversal or resistance to a move is likely to be encountered: - 0n reaching levels at which in the past, the commodity has fluctuated for a considerable length of time within a narrow range - On approaching highs or lows T3. Watch for good buying or selling opportunities when trend lines are approached, especially on medium or dull volume. Be sure such a line has not been hugged or hit too frequently. T4. Watch for "crawling along" or repeated bumping of minor or major trend lines and prepare to see such trend lines broken. T5. Breaking of minor trend lines counter to the major trend gives most other important position taking signals. Positions can be taken or reversed on stop at such places. T6. Triangles of ether slope may mean either accumulation or distribution depending on other considerations although triangles are usually broken on the flat side. T7. Watch for volume climax, especially after a long move. T8. Don't count on gaps being closed unless you can distinguish between breakaway gaps, normal gaps and exhaustion gaps. T9. During a move, take or increase positions in the direction of the move at the market the morning following any one-day reversal, however slight the reversal may be, especially if volume declines on the reversal.

General Trading rules

G1. Beware of acting immediately on a widespread public opinion. Even if correct, it will usually delay the move. G2. From a period of dullness and inactivity, watch for and prepare to follow a move in the direction in which volume increases. G3. Limit losses and ride profits, irrespective of all other rules.G4. Light commitments are advisable when market position is not certain. Clearly defined moves are signaled frequently enough to make life interesting and concentration on these moves will prevent unprofitable whip-sawing. G5. Seldom take a position in the direction of an immediately preceding three-day move. Wait for a one-day reversal.G6. Judicious use of stop orders is a valuable aid to profitable trading. Stops may be used to protect profits, to limit losses, and from certain formations such as triangular foci to take positions. Stop orders are apt to be more valuable and less treacherous if used in proper relation the the chart formation. G7. In a market in which upswings are likely to equal or exceed downswings, heavier position should be taken for the upswings for percentage reasons - a decline from 50 to 25 will net only 50% profit, whereas an advance from 25 to 50 will net 100%G8. In taking a position, price orders are allowable. In closing a position, use market orders." G9. Buy strong-acting, strong-background commodities and sell weak ones, subject to all other rules. G10. Moves in which rails lead or participate strongly are usually more worth following than moves in which rails lag.G11. A study of the capitalization of a company, the degree of activity of an issue, and whether an issue is a lethargic truck horse or a spirited race horse is fully as important as a study of statistical reports.

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Investing in the financial markets can involve considerable risk. Past performance is not necessarily an indication of future performance. The information included in The Smart Money Tracker and The SMT subscribers daily updates is prepared for educational purposes and is not a solicitation, or an offer to buy or sell any security or use any particular system. Information is based on historical research using data believed to be reliable, but there is no guarantee as to its accuracy. G.D.S L.L.C., nor Gary Savage, do not represent themselves as acting in the position of an investment adviser or investment manager for funds that are not under their direct control and fiduciary responsibility. GDS L.L.C., Gary Savage, will not provide you with personally tailored advice concerning the nature, potential, value or suitability of any particular security, portfolio or securities, transaction, investment strategy or other matter. From time to time, GDS L.L.C., Gary Savage, may hold positions in securities mentioned, but are under no obligation to hold such positions.